Friday, January 13, 2012

A critical examination of the central contributions of Michael Porter to the development of management thought

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University of Canberra

Introduction to Management

Assignment � Essay

A critical examination of the central contributions of Michael Porter to the development of management thought

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A critical examination of the central contributions of Michael Porter to the development of management thought.

Michael Porter is the Bishop William Lawrence University Professor at Harvard. He is seen by many as a leading authority on strategic management and competitiveness. Throughout the western world universities, chief executive officers of billion dollar corporations and governments have used his principles on competitive strategy. Porter’s major contribution has been to detail carefully how management can create and sustain a competitive advantage that will achieve profitability above the industry average (Robbins, 17, p. 60). Evidence of his work in management thought is highlighted by his expansive writing. Porter has written 16 books and 75 articles to the area of strategic management. Three of his major contributions in strategic management have been the books ‘Competitive Strategy Techniques for Analyzing Industries and Competitors (180)’ which is now in it’s 5rd printing, ‘Competitive Advantage Creating and Sustaining Superior Performance (185)’ and ‘The Competitive Advantage of Nations (10)’.

These three texts are concerned primarily with structure-conduct-performance theory (O’Shannassy, 1, p.1) where economics had an important role in the management context. From these theories Porter devised three main frameworks (the five forces analysis, the value chain and the diamond model). Within his writings these became valuable tools in the management world.

Although it is widely accepted that Michael Porter has made a huge contribution in the field of strategic management he is not without his critics. For instance, people such as Mintzberg and O’Shannesy believe that Porter’s scientific approach does not pay enough attention to the firm itself or management intuition. Other studies suggest that Porter’s one generic strategy model does not apply to all industries and his ‘stuck in the middle’ theory is inconsistent.

Porter’s main contributions

Strategic management came into trend in the 180’s with a focus on competitive advantage. Michael Porter has made a strong contribution in understanding the external entities confronting organisations. Porter’s major contribution to strategic management has been his ability to help organisations create and sustain a competitive advantage that delivers a higher than average industry profit.

In his first major work in 180, ‘Competitive Strategy Techniques for Analyzing Industries and Competitors’ Porter’s goal was to

‘present a comprehensive framework of analytical techniques to help a firm analyze its industry as a whole and predict the industry’s future evolution, to understand it’s competitors and its own position, and to translate this analyse into a competitive strategy for a particular business’ (Porter, 180, p. x).

In Porter’s aim of trying to bridge the gap of business economics and strategy he developed the five competitive forces model. The forces involved consist of industry competitors, potential entrants, suppliers, buyers and substitutes. Porter believes that these forces dictate the rules of competition and determine industry profitability as they directly influence prices, cost structures and capital investment requirements and manager’s should assess their organisation by evaluating it in the terms of these five factors.

Porter believed that companies needed to choose one of the following strategies cost-leadership, differentiation or focus. Cost-leadership related to striving to become the lowest cost producer in the relevant industry; differentiation meant striving to develop a product or service that was unique and also valued by buyers; and focus aims at segments of industries such as specific consumer groups or product lines.

Porter believed, also that for a company to be at a competitive advantage by pursuing a low cost approach they needed to adopt one of these three generic strategies. He believed by trying to be all things to all people companies are spreading themselves too thinly and therefore not obtaining in advantage or ‘difference’ in the industry. These three specific generic strategies are considered a classic and have become a ‘dominant paradigm’ in business policy and research (Hill, in Rubach, 18, p.1). Studies by Hambrick (18) have also found support for Porter’s generic strategies. Research has clearly shown that among the higher producing firms all three generic strategies are present and that one strategy was clearly the focus in individual circumstances. (Rubach, 18, p.1).

Porter uses the term ‘stuck in the middle’ to describe organisations that have failed to gain a competitive by using one of the above generic strategies. Such companies find it hard to achieve long term success unless they are apart of an industry doing particularly well or by coincidence all their competitors happen to be stuck in the middle as well. Porter believes that the secret to long term success is resisting the actions by their competitors or changes in the industry for a reason to change their strategy. Porter is the first to admit that this is no easy task due to technology and customer change and the fact that competitors can easy imitate advantages an organisation has. Ways of achieving long term success include strong economics of scale, reducing price gain to volume, tying up suppliers with contracts and encouraging government policies that reduce foreign competition (Robbins, 17, p. 61). Management must also stay on their toes in order to sustain competitive advantage and keep one step ahead of the competition.

However, despite the developments in the mid-80’s strategic management, many believed it was developing short falls in the implementation of strategy. In 185 Porter felt that many companies had lost sight of competitive advantage in their struggle to pursue growth and diversification and turned to such tools as total quality management (TQM), benchmarking and reengineering (Porter, 185, p.x). This lead to his second major work entitled ‘Competitive advantage creating and sustaining superior performance’. Out of this work Porter developed the value chain. The value chain distinguishes centrally between activities that directly produce, market, and deliver the product and those that create or source inputs or factors (including planning and management) required to do so (Porter, 11, p. 0). The value chain is a tool that helps management to focus on value for their customers.

Porter’s third major contribution to strategic management was his book ‘The competitive advantage of nations’. By the 10’s Porter’s theories were regarded highly across both institutions and the industry and his contribution to global competition was welcomed. This again provided management with another tool, the diamond model, toward implementing and maintaining a competitive advantage. The diamond model relates firm strategy, structure and rivalry, factor conditions, relating and supporting industries and demand conditions. Porter believes these attributes shape the information firms have available to perceive opportunities, the pool of inputs, skills and knowledge they can draw on, the goals that condition investment, and the pressure on firms to act (Porter, 11, p. 101)

Criticisms of Porter’s contributions

Porter was the first to attempt to create a management strategy from economics; this did not come without its criticisms. It is felt that Porter pays far too much attention to the environment facing the firm and to how it should position itself in that environment � and almost no attention to the firm itself (Langlois, 000, p.1) it would appear that Porter’s organisation would be quite hollow relying heavily on an unpredictable environment.

Porter’s 180 text proposes that for a company to sustain competitive advantage they needed to stay significantly different to their competitors. While Porter’s generic strategies received considerable support there has also been doubt that these strategies can be separate. There have been a number of studies done by people such as Hill (188), Murray (188), Wright (187) and Miller (1) that disagree with Porter’s one generic strategy method (Rubach, 18, p.1). These studies suggest that a combination of strategies can achieve superior performance, especially within mature industries that are experiencing technological change. The greatest complaint of Porters generic strategies model is that it does not fit all industries. A study done by Pitelis and Taylor suggests that they use of a variety of strategies combined is far more effective in the retail industry (Rubach, 18, p.1).

This leads to Porter’s ‘stuck in the middle’ concept. As some of the above studies have shown, a combination of generic strategies can work this suggest that Porter’s ‘stuck in the middle’ theory is not consistent with these results. Porter believed a company that was ‘stuck in the middle’ would last or get ahead in its field, the above study by Pitelis and Taylor had shown that this is not so in the retail industry (Rubach, 18, p.1).

Another criticism of Porter is a study done by Dawes and Sharp reassess Hooley’s interpretation of the Generic Marketing Structures clusters using the dimensions upon which Porter based his strategy scheme (Dawes, 16, p. 6). The study was done to provide insight into strategy clusters using a mapping technique; the results were designed to show whether or not similar strategies would result in similar performances or if unknown factors were influencing results (Dawes, 16, p. 6). Hooley felt the results of his research could lead managers to take a very different approach. Dawes and Sharp went against Hooley’s findings and felt that Porter’s generic competitive strategies were of little use in the interpretation of the clusters identified. Further they felt it provided no evidence that these generic strategies were routes to superior profit.

Porter’s later work too has been criticised. It has been suggested by many that Porter developed a ‘theory of strategy’. However, economists and marketers tend to dispute this (Harfield, 18, p.1). Foss (16) used Porter as an example of the field becoming too pluralistic and that the later Porter is adding nothing to the ‘foundations’ of the field (Harfield, 18, p.1). Hammonds believes that strategy has suffered simply because people tried it, had problems with it and turned instead to the fads of the time. While many people acknowledge Porter’s contributions but found them extremely difficult to implement. There has been a view that if you had a strategy it was rigid, inflexible and out of date by the time that you used it. In an increasingly changing technological environment these issues were extremely important. Although Porter always pointed out that ‘technology changes, strategy doesn’t’ a lot of organisations got very confused about strategy and how to address it. Mintzberg (10) and Bartlett and Ghoshal (11) criticised Porter for narrowing the focus of strategic management by focusing on the industry and the situation confronting the firm regarding the position. Mintzberg also felt that the scientific approach to strategic management felt so wrong and that many managers favour intuition when making strategies (Mintzberg, 14, p.10).

Finally Porter acknowledged that there are four principle issues that challenge a theory of strategy (Porter, 11, p. 84-85). The four principles issues include approach to theory building; chain of causality; time horizon and empirical testing. The main problem behind these issues is that they are all situation/organisation specific where as Porter’s frameworks and models are generic and suited to all. Therefore a company can not simply implement Porter’s ideas without being faced with some seriously difficult questions.

Porters theories do not relate to practice as well as they do to theory for many. However, despite these criticisms Porter was amongst the first with the ability to analyse management in the competitive economic context. His highlighting the need to focus on external entities confronting organisations and how to gain a competitive edge in business has lead to scholarly thought and critical review of business, profit and context. The implementation of his theories and strategies by business has assisted many in the western world to gain the competitive edge for their company. As is always the case theories will continue to be critically examined and evolved within the changing economic context. At this stage, despite criticism, Porters contribution to management theory continues to have relevance for many in business practice.

O’Shannassy, T (1) ‘Lessons from the Evolution of the Strategy Paradigm’ Working Paper Series RMIT Business, WP /0. Downloaded from web site on 0/04/01 http//www.bf.rmit.edu.au/RDU/staffinfo/oshann_lessons.pdf

Rubach, M.J. & J.M. (18) ‘”Stuck in the middle” for retailers, perhaps not such a bad place to be’ . Downloaded from web site on 0/04/01 www.sbaer.uca.edu/docs/proceedingsII/8asb.htm

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